Vendor Financing: How It Works, Pros & Cons in 2025 Australia

Vendor financing is quietly transforming the way Australian businesses and property buyers seal deals—especially in a market where traditional lending can be a hurdle. With the Reserve Bank of Australia maintaining a tight hold on interest rates in early 2025 and banks applying stricter lending criteria, vendor financing has emerged as an alternative path for buyers and sellers to get transactions across the line. But what exactly is vendor finance, and how does it work in practice?

What Is Vendor Financing?

Vendor financing, sometimes called seller finance, is when the seller of a business, property, or asset lends money directly to the buyer to complete the purchase. Instead of (or in addition to) bank finance, the buyer repays the seller over an agreed period, often with interest, via regular instalments. Vendor finance is most common in business sales, commercial property, and the sale of franchises—but it’s popping up in residential property deals too, particularly in regions where buyers struggle to secure full bank loans.

For example, a retiring small business owner might offer vendor finance to a buyer who can’t secure a full bank loan, funding 20-50% of the purchase price themselves and receiving repayments over 2-5 years. In property, a seller might offer to ‘carry the mortgage’ for a few years until the buyer can refinance with a bank.

How Vendor Financing Works in Practice

Every vendor finance deal is unique, but the typical process looks like this:

• Negotiation: Buyer and seller agree on price, how much finance the vendor will provide, repayment terms, and interest rate (often higher than banks, reflecting greater risk).
• Legal Agreement: A formal contract sets out the loan amount, security (often a second mortgage or charge over the asset), repayment schedule, default provisions, and what happens if the buyer can’t pay.
• Settlement: The buyer pays a deposit (often 10-30%), and the vendor finances the balance. The buyer takes possession and starts repayments.
• Completion: When the loan is repaid, the buyer owns the asset outright. If the buyer defaults, the seller may repossess the business or property.

Vendor finance has gained traction in 2025 as banks have tightened their assessment criteria for business and commercial property loans, particularly for SMEs and first-time buyers. The 2025 Small Business Finance Report from the Australian Small Business and Family Enterprise Ombudsman highlighted a 15% increase in vendor-financed business sales compared to 2023, especially in regional Australia.

Pros and Cons of Vendor Financing

Pros for Buyers

• Easier Access to Finance: Bypass strict bank lending criteria and secure deals that may otherwise be out of reach.
• Flexible Terms: Repayment schedules, interest rates, and security arrangements can be negotiated to suit both parties.
• Faster Settlement: With fewer institutional hoops, deals can close more quickly.

Pros for Vendors

• Wider Pool of Buyers: Attract buyers who may not qualify for bank loans, increasing the chance of a sale.
• Potential for Higher Sale Price: Sellers may command a premium for offering finance.
• Ongoing Income: Earn interest on the finance provided.

Cons for Buyers

• Higher Interest Rates: Vendor finance typically costs more than bank loans.
• Shorter Loan Terms: Repayment periods are often 1–5 years, requiring a refinance or lump-sum payment at the end.
• Risk of Repossession: If you default, the vendor may reclaim the asset.

Cons for Vendors

• Ongoing Risk: If the buyer defaults, the vendor may need to repossess and resell the asset.
• Delayed Full Payment: The sale proceeds are not received upfront.
• Legal and Administrative Complexity: Vendor finance contracts require careful drafting and ongoing management.

Real-World Example: Vendor Financing in 2025

In early 2025, a Melbourne-based café owner sold their business to an aspiring entrepreneur who could only raise a 50% deposit. The seller agreed to finance the remaining $200,000 over three years at 8% interest—higher than major banks’ business rates, but competitive in the current tight credit environment. The vendor secured the loan against the business assets and included a clause to repossess if repayments fell more than 60 days overdue. For the buyer, this arrangement made ownership possible; for the seller, it meant a steady income and a successful exit, albeit with some ongoing risk.

2025 Policy Updates and Trends

Vendor finance arrangements are under increased scrutiny in 2025. The Australian Securities and Investments Commission (ASIC) has issued new guidance to ensure transparency and protect both parties, particularly in residential property deals. Notably, all vendor finance contracts now require independent legal advice and written disclosure of risks and costs. The Australian Taxation Office (ATO) has also clarified the GST and capital gains tax treatment of vendor-financed transactions, urging sellers to seek tax advice before structuring deals.

Is Vendor Financing Right for You?

Vendor financing isn’t for everyone, but in today’s market, it’s a powerful tool to bridge the gap between buyers and sellers. Whether you’re looking to buy a business, sell a property, or simply want a creative approach to deal-making, understanding vendor finance can give you a crucial edge in 2025’s competitive landscape.